Sep. 8–It is, at its core, a struggle with roots more than two centuries old: the federal government versus state authority.
The issue, appropriately enough in a nation of stockholders, is how far states can go in setting rules on broad securities issues.
The case in point: the so-called global settlement on research conflicts of interest that elicited $1.4 billion in penalties from 10 leading Wall Street firms, spearheaded by New York Atty. Gen. Eliot Spitzer.
As states launch very public investigations in the wake of corporate scandals, a showdown looms in Congress over an effort to prevent state regulators from entering into comprehensive agreements to change the structural practices of securities firms.
Supporters say it’s important to prevent a patchwork of rules and meddling by ambitious state politicians over practices that affect the entire nation. Opponents say it will hamstring vital state regulators at the time they’re needed most.
Had this measure been in place three years ago, foes say, Wall Street would still be operating under the same system that encouraged analysts to enthusiastically tout firms they knew in their heart–and admitted in their e-mails–were a house of cards.
Without state action, “it seems highly unlikely” the Securities and Exchange Commission would have stepped in, said Roy Green, senior legislative representative at the AARP, which opposes the measure pending in Congress.
“One could argue the SEC has been asleep at the switch on some of these things,” he said.
Perhaps, proponents of the measure say. But the SEC has taken the lead on other issues, they said, and this proposal would do nothing to hinder state enforcement.
It only ensures, they said, that when states want to lay down broader rules, they don’t move forward without having the SEC on board.
“They can still investigate. They can still fine. They can still enforce. They can still regulate,” said Richard Hunt, senior vice president of the Securities Industry Association, a strong supporter of the measure.
“It still gives them all the power they need, except that at the end of the day, they need the SEC at the table,” he said. “We believe we need national standards for a national market.”
Opponents counter that such a system deprives state officials of a powerful stick and strips away their incentive to undertake wide-ranging investigations.
States and the SEC have long worked together to ensure adequate oversight of the securities industry, they say, and it’s unnecessary to restrict state authority at all.
“Investors and consumers should want there to be as many cops on the beat as possible,” said Lee Drutman, communications director at Ralph Nader-founded Citizen Works, which has fought the provision.
“Each state regulator is out there to protect the people in his or her state,” Drutman said. “If they want to have high standards for the securities business in their state … I think that’s important.”
The measure is part of a widely supported bill to bolster the SEC’s authority to investigate and punish securities violations, including larger penalties, hiring outside legal and collection assistance, and enhanced ability to use funds for investor restitution.
In July, the bill’s author, Rep. Richard Baker (R-La.), chairman of the House capital markets subcommittee, secured passage of the amendment to preclude state authorities from entering into agreements that modify federal securities law.
Baker argued it was a natural extension of laws that prevent state legislatures from doing the same thing. But in light of Spitzer’s central role in achieving the global settlement, it attracted sharp opposition.
Spitzer, a clear target of the bill, quickly panned it, arguing that “state regulators are at the front lines of investigating investment schemes” and took the lead in challenging Wall Street.
“This action shreds one of the most basic protections that investors have against fraudulent activities,” he said.
The lineup on both sides of the issue is fairly predictable: SEC Chairman William Donaldson has indicated support for the measure, while state securities regulators, congressional Democrats and citizens groups rose up in opposition.
Just before Congress went on its August recess, Baker agreed to postpone consideration.
Acknowledging the measure had sparked “a great deal of controversy,” Baker signaled he’d be willing to consider a compromise, but complained that none had been forthcoming. He also remained steadfast on its fundamental principle.
“We cannot have a single person in an executive capacity at the state level writing national securities law, although there should be unquestioned ability for him to prosecute, investigate, fine or take any action any state prosecutor thinks appropriate,” Baker said.
With negotiations on a compromise now under way, House officials say they don’t know when the full Financial Services Committee will take up the issue.
Meanwhile, state regulators have continued to press forward. Oklahoma Atty. Gen. Drew Edmondson raised eyebrows late last month when he filed felony charges against embattled phone company WorldCom Inc. and six former employees, including ex-chief executive Bernard Ebbers.
Then, last week, Spitzer announced a wide-ranging investigation into several mutual fund firms over what he called illegal trading with hedge funds, and state regulators are probing other mutual fund and Wall Street issues.
Such actions renewed concern about the so-called Balkanization of securities regulation, with states stepping in to concoct multiple rules and overlapping prosecution.
“You can’t have two different rules, much less 50 different rules, for a national market,” the SIA’s Hunt said.
Opponents, however, said having joint state and federal authority has worked just fine.
“The dual system, it seems to us, is not a Balkanization, but having two sets of eyeballs” on regulatory issues, the AARP’s Green said.
Although the measure’s prospects are uncertain, Baker has expressed his determination to press on. He and committee Chairman Michael Oxley (R-Ohio), a co-sponsor of the full bill, are influential voices on securities issues.
If it clears the House, however, the Senate may be a different matter. Sen. Paul Sarbanes (D-Md.), co-author with Oxley of last year’s landmark governance law, opposes the provision and says it would undergo intense scrutiny. Senate Republicans may not be able to muster the votes behind it.
Although some supporters are dubious, opponents are hopeful the broader bill will pass without the amendment.
“It has served to frustrate what otherwise is a totally acceptable piece of legislation,” Green said, adding he has trouble envisioning a compromise.
“I think there’s a reasonable chance the legislation might move forward without that amendment.”
—–
To see more of the Chicago Tribune, or to subscribe to the newspaper, go to http://www.chicago.tribune.com/
(c) 2003, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News.
